Bangladesh: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh

1. Bangladesh has made substantial progress in its first 50 years of independence. From being one of the poorest nations in 1971, Bangladesh successfully met the UN criteria to graduate from the category of Least Developed Countries (LDC) in February 2021.1 Since 2010, per capita real GDP growth, averaging 5 percent annually, has resulted in a steady decline in poverty, with increasing access to education and healthcare (Figure 1). Following an export-oriented development strategy, Bangladesh has successfully transformed to a more manufacturing-based economy. Macroeconomic policies have been successful in keeping inflation stable, debt-to-GDP ratio low, and external buffers adequate.

Abstract

1. Bangladesh has made substantial progress in its first 50 years of independence. From being one of the poorest nations in 1971, Bangladesh successfully met the UN criteria to graduate from the category of Least Developed Countries (LDC) in February 2021.1 Since 2010, per capita real GDP growth, averaging 5 percent annually, has resulted in a steady decline in poverty, with increasing access to education and healthcare (Figure 1). Following an export-oriented development strategy, Bangladesh has successfully transformed to a more manufacturing-based economy. Macroeconomic policies have been successful in keeping inflation stable, debt-to-GDP ratio low, and external buffers adequate.

Context

1. Bangladesh has made substantial progress in its first 50 years of independence. From being one of the poorest nations in 1971, Bangladesh successfully met the UN criteria to graduate from the category of Least Developed Countries (LDC) in February 2021.1 Since 2010, per capita real GDP growth, averaging 5 percent annually, has resulted in a steady decline in poverty, with increasing access to education and healthcare (Figure 1). Following an export-oriented development strategy, Bangladesh has successfully transformed to a more manufacturing-based economy. Macroeconomic policies have been successful in keeping inflation stable, debt-to-GDP ratio low, and external buffers adequate.

Figure 1.
Figure 1.

Bangladesh: Significant Progress Since Independence

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

uA001fig01

Significant Progress in Accessing Basic Services

(Score, 0–100)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Development indicators.Note: the highest value scaled to 100. A higher value indicates better perform an ce.1/ Access to electricity (% of population)2/ People using safely managed sanitation services (% of population)3/ People using safely managed drinking water services (% of population)

2. The country’s aspiration to reach upper-middle income status by 2031 requires building on successes and addressing structural issues. Despite significant progress, job creation has been slowing, inequality has been rising, and poverty reduction has been slower than during the previous decade. Lack of education and skills remain the main hurdle for transiting into the formal economy. Supply bottlenecks, especially in transport infrastructure, are constraining growth. With LDC graduation, Bangladesh will gradually lose access to concessional financing (nearly half of total external financing in 2018) and preferential trade treatments, which have played a key role in boosting export competitiveness.2 As envisaged in the 8th Five-Year Plan (FYP), sustaining high pro-poor growth (above 8 percent) to reach upper-middle income status requires, among others, developing new growth engines and increasing productivity to create decent jobs for an estimated 2.2 million job market entrants annually; bridging infrastructure gaps; investing in human capital; and addressing climate vulnerabilities. Enhancing productive investments to achieve these goals will require mobilizing domestic revenues and attracting private investment by strengthening governance, improving the investment climate, and modernizing policy frameworks.

uA001fig02

Remaining Gaps in Transportation Infrastructure

(Score, 0–1 DO)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Economic Forum, Global Competitiveness Index, 2013 dataset and IMF Staff calculations.Note: The highest value scaled to 100. A higher value indicates better performance.1/ Road connectivity and quality of road infrastructure2/ Airport connectivity and efficiency of air transport services3/ Liner shipping connectivity and efficiency of seaport services
uA001fig03

Competitiveness by Category

(Score, 1 -100, 2019, the higher the score the more competitive the country is in the given category)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Economic Forum, Global Competitiveness Index 2019 dataset and IMF Staff Calculations.Note: Regional average includes countries for which data are available.

Covid-19 Impact and Policy Response

3. The authorities reacted quickly and decisively to address the economic fallout of the pandemic. In response to the several waves of the pandemic, the authorities imposed multiple nation-wide lockdowns (March 26-May 30, 2020 and April 14-August 10, 2021). The second lockdown exempted the ready-made garment (RMG) sector and allowed for limited transportation. To curb the spike in cases in early 2022, some less stringent restrictions were introduced. Entering the crisis with macroeconomic stability, the authorities announced support packages worth Tk 1 trillion in the form of wage support, working capital loans and social assistance. This was gradually scaled up to Tk1.9 trillion (US$22 billion or 6 percent of GDP) (Annex II), by curtailing non-priority current spending, and suspending low-priority capital projects.

uA001fig04

Daily Positive Rate of COVID-19

(Percent of daily new testing, March 2020 to Dec 2021)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Our World in Data.

4. Vaccination is catching up despite initial constraints due to supply shortages. The authorities moved swiftly to secure vaccine financing from development partners and allocated ample funds for vaccine-related spending. The national COVID-19 vaccination strategy, kickstarted in early January 2021, stalled due to significant global vaccine supply shortages between April and June. Mass vaccination resumed in July 2021 and the vaccination is catching up with regional peers (Figure 2). The authorities have started providing booster doses to the most vulnerable groups.

Figure 2.
Figure 2.

Bangladesh: COVID-19 Crisis Disrupted the Growth Momentum

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

uA001fig05

Bangladesh Bank Policy Rates

(Monthly, EOP, Percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Sources: Haver Analytics; and CEIC.

5. Bangladesh Bank (BB) eased monetary policy and increased liquidity in the banking system.3 BB decreased the cash reserve ratio for domestic banks by 150 bps, the bank rate by 100 bps, the repo rate by 125 bps, and reverse repo by 75 bps. The advance to deposit ratio was increased by 2 percentage points and refinancing schemes worth Tk 5.5 billion were introduced. BB also increased liquidity, including through unsterilized foreign exchange (FX) interventions, leading to historically low interest rates on government securities.

6. The banking sector played a crucial role in channeling the stimulus packages. The bulk of COVID-19 stimulus support was designed in the form of an interest subsidy for working capital loans and loans to Cottage, Micro, Small and Medium Enterprises (CMSMEs) at subsidized interest rates. Several forbearance measures were introduced including a loan moratorium, reclassification freeze, and a relaxation of repayment terms (Annex VII). BB also introduced revolving refinancing facilities. Given the importance of CMSMEs, several specifically targeted initiatives were launched, including a guarantee scheme to encourage lending to the CMSME sector (Annex II).

7. Real GDP grew by 3.5 percent in FY20 and is estimated to have picked up to 5.0 percent in FY21.4,5 At the onset of the pandemic, exports, imports, and remittances contracted sharply, and the nation-wide lockdown led to a decline in domestic economic activity. Given the pandemic only affected the final quarter of FY20, unlike regional peers, growth in Bangladesh remained positive despite falling to a historically low level (lowest since 1991). In FY21, exports and imports rebounded strongly, reaching almost pre-pandemic levels, reflecting the fast recovery of external demand from main trading partners, high take-up of stimulus packages by the export sector, and exemption of the RMG sector from the second-round lockdowns. Remittances surpassed pre-crisis levels, supporting consumption and moderating the current account deficit to 1.3 percent of GDP in FY21 from 1.7 percent in FY20.6 Private credit growth, however, remained subdued. The domestic recovery in FY21 was disrupted by the second and third waves. The nation-wide lockdown, coupled with the low vaccination rate, resulted in a modest recovery in FY21.

8. The pandemic has taken a toll on lives and livelihoods and has increased the urgency to implement longstanding structural reforms. Based on modeled ILO estimates, the unemployment rate in FY20 rose to 5.3 percent from 4.2 percent in FY19. The poverty rate (based on US$1.9 in 2011 PPP) rose from 11.9 percent in FY19 to 12.9 percent in FY20, adding 1.6 million new poor.7 The most vulnerable groups, such as low-skilled and informal workers, youth and women were the hardest hit. Among adults in Dhaka and Chittagong who lost their jobs due to the pandemic and were still not working by February 2021, 2 out of 3 were women.8 Structural reforms have become even more urgent to reverse these trends and to boost inclusive, resilient, green growth.

Outlook and Risks

9. Growth is projected to increase gradually as the impact of COVID-19 abates. Growth is expected to pick up to 6.6 percent in FY22, supported by a robust rebound in exports, continued implementation of the stimulus packages; and accommodative monetary and fiscal policies. However, the lockdown and restrictions, subdued private credit growth, and a low vaccination rate point to a modest recovery. As the external environment improves and the domestic vaccination program progresses, growth is expected to reach 7.1 percent in FY23. The pandemic’s impact is expected to spill over into the medium term leading to a loss in the output level compared to pre-pandemic projections.9 Headline CPI inflation is projected to rise to 5.9 percent in FY22, slightly higher than BB’s yearly target of 5.3 percent. As the economy picks up, non-food inflation is projected to edge up to 6.4 percent, and food inflation is also expected to rise moderately due to higher international commodity prices.

uA001fig06

Real GDP Forecast Revision After the Pandemic

(Jan 2020 WEO vs. Oct 2021 WEO forecasts, 2019 Real GDP=100)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Economic Outlook.Note: Bangladesh is excluded from the South Asia group for comparison.

10. The fiscal deficit is projected to peak at 6.1 percent of GDP in FY22 as pandemic-related spending increases. The FY22 budget and the medium-term framework have set ambitious revenue targets. Absent reforms, revenue is expected to remain almost flat (about 11 percent of GDP) over the medium term, 0.7 percent of GDP below the authorities’ targets. Nevertheless, the authorities have established a track record of remaining within their deficit target by reprioritizing spending. A timely and orderly exit from the stimulus, as well as the gradual rebound of the economy, are expected to bring the deficit back to the authorities’ medium-term target of 5 percent of GDP by FY25.

uA001fig07

Fiscal Balance, Revenue and Spending

(Projections in percent of GDP)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Ministry of Finance and IMF staff estimates.

11. The current account (CA) deficit is projected to widen in FY22 and stabilize over the medium term. With the expected moderation in remittances and a pickup in imports, the CA deficit is projected to increase to 2.4 percent of GDP in FY22. In the medium term, the CA deficit-to-GDP ratio is expected to stabilize at around 2.5 percent of GDP with the share of exports to GDP expected to grow only modestly absent major reforms, and the increase in imports and remittances to moderate.

uA001fig08

Current Account Balance and Reserve Coverage

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Sources: Data from authorities arid IMF staff estimates.

12. The external position is broadly in line with the level implied by fundamentals and desirable policies in FY21. (Annex III). With the one-time surge in remittances, reserve coverage peaked at 7.0 months of prospective imports at end FY21. Reserves are projected to decline over the medium term, staying around 5 months of prospective imports due to a higher CA deficit in a stabilized exchange rate regime, expected normalization in remittance inflows, and no substantial pick up in FDI.10,11 To help mitigate this projected decline in reserve coverage, the authorities have appropriately used the recent SDR allocation of US$1.457 billion (0.4 percent of GDP) to bolster reserves. External public and publicly guaranteed debt is projected to remain sustainable around 14 percent of GDP over the medium term (DSA). Bangladesh remains at a low risk of external and overall risk of debt distress.

13. Uncertainty around the outlook remains exceptionally high and risks are tilted to the downside. A slower than expected recovery in trading partners, an increase in food and oil prices, and heightened risks from cyber-attacks are key external risks. Domestically, another surge of COVID-19 requiring strict containment measures, a lower-than-expected vaccination rate, and elevated non-performing loans (NPLs) could present a drag on growth prospects, while slow progress in resolving the Rohingya crisis could lead to donor fatigue. The risk of natural disasters continues to loom (Annex IV). On the upside, a stronger than expected global recovery and acceleration in Annual Development Plan (ADP) execution could spur a stronger recovery.

Authorities’ Views

14. The authorities view that the pick-up in economic activity will continue and inflation will remain contained. They are targeting FY22 growth rate to be 7.2 percent, supported by continued implementation of the stimulus packages, recovery in domestic demand, and strong pickup in exports. The authorities share staff’s concerns about inflationary pressures from rising international commodities prices, but expect the impact to be muted and temporary, abating in about nine months. On the external sector, the authorities noted that export growth has been robust —partly fueled by the diversion of orders from elsewhere in Asia, and import growth is expected to ease. The authorities acknowledge that remittances will normalize. The authorities have secured over 300 million vaccine doses and are confident of achieving their target of vaccinating 70 to 80 percent of the total population by early 2022. They broadly share staff’s assessment on risks. The authorities plan to gradually reduce the fiscal deficit to 5 percent of GDP over the medium term. On debt, authorities agreed that high interest costs are increasing the debt service and that the NSC reforms would help.

Policy Discussions

The near-term policy measures should aim to make room in the budget for health and social spending, while preserving reserve adequacy and enhancing fiscal transparency and governance. Once the pandemic is under control, policy priorities should shift back to creating greater fiscal space to expand developmental and social spending, reducing fiscal risks, preserving the stability of the financial system, and modernizing the monetary and financial system to support a solid recovery and to mitigate the medium-term economic impact of COVID-19. Such policies will also help prepare the ground to meet longer term development financing needs of the economy.

A. Creating Fiscal Space for Growth-Enhancing and Inclusive Spending

15. Near-term fiscal policy should continue to support the recovery by prioritizing expenditure and improving administrative efficiency. Staff views the authorities’ baseline fiscal path as appropriate in the near term. Bangladesh is assessed to retain some fiscal space owing to low public and external debt levels, though fiscal space is constrained by very low tax revenues. The authorities should stand ready to ramp up health and social spending, as risks are tilted to the downside. Emergency spending needs could be met through increasing revenues by rationalizing regressive tax expenditure, postponing low-priority capital spending, and saving on current spending. Reducing interest expenses from National Savings Certificates (NSCs) and improving administrative efficiency of the National Board of Revenue (NBR) and line ministries—including by leveraging on the authorities’ current digitalization efforts—will help increase fiscal space in the absence of significant tax policy reforms during the pandemic.

16. Higher revenues are necessary to achieve developmental and social targets in a fiscally sustainable way. Revenue as a share of GDP has remained persistently low and trailed behind peers, with the gap relative to the median of other countries in the region and emerging markets (EMs) increasing since 2013. Bangladesh needs to spend more on health, education, and social safety nets (Annex V) and boost investment in infrastructure. Although the risk of debt distress remains low, risks from a rising debt service-to-revenue ratio have increased, and developmental and priority spending—including to support the recovery—will continue to put pressure on public finances.

uA001fig09

Government Revenue

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

17. Raising tax productivity will help mobilize revenues. Bangladesh’s standard Value Added Tax (VAT) rate of 15 percent is in line with that of other countries, but VAT revenue productivity is low. Similarly, the corporate income tax (CIT) and personal income tax (PIT) productivities are lower than the median and closer to the bottom quartile of the measures of peer countries despite comparable tax rates. The difference in revenue performance points to a low tax base, resulting from tax exemptions and generous tax holidays as well as weak revenue administration and low compliance. The 2012 VAT and Supplementary Duty Act, implemented in 2019, has not yielded expected revenues due to multiple VAT rates that exacerbated revenue leakage and rendered tax collection more difficult. In the presence of a large informal sector, streamlined consumption and excise taxes provide an administratively feasible way of increasing revenues.

uA001fig10

Personal Income Tax Productivity, 2019

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Sources: IMF FAD Tax Rates Database, IMF World Economic Outlook: IMF staff calculation.Notes: PIT Productivity 2 PIT Revenue in percent of GDP/[(Lowest PIT Ratex Lowest Threshold)+(Highest PIT ratex Highest PIT threshold)/Lowest PIT Threshold +Highest PIT Threshold)]
uA001fig11

VAT Revenue, Standard Rate, and C-Efficiency, 2019

(in percent of GDP and percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: IMF Internal World Revenue Longitudinal Database (WORLD); IMF Internal Tax Rates Database. C-Efficiency is calculated as (VAT Revenue) / [(VAT Rate) * (Total Consumption)].
uA001fig12

CIT Revenue, CIT Rate, and CIT-Productivity, 2019

(in percent of GDP and percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: IMF Internal World Revenue Longitudinal Database (WoRLD); IMF Internal Tax Rates Database. CIT-Productivity is calculated as (CIT Revenue in percent of GDP)/ (CIT Rate).

18. A multipronged revenue strategy is required to strengthen revenue in line with the authorities’ aspirations. The 8th FYP has set the revenue target to reach 14 percent of GDP by FY25. While the recent efforts to promote electronic fiscal devices for VAT collection and to increase nontax revenue by collecting the surplus cash of the SOEs will help, mobilizing revenue to meet the aspirational targets would require both tax policy and revenue administration reforms. Expansion of well-targeted social spending will help protect the poor as well as build broader consensus for tax reforms.

Tax Policy Reforms:

  • Amend the tax and customs codes to rationalize tax expenditures.

  • Develop and adopt a medium-term revenue strategy.

  • Review and simplify the VAT structure to improve compliance and enhance the ability of the NBR to efficiently administer it.

  • Refrain from tax amnesty initiatives to prevent lower compliance in the future.

uA001fig13

Income Level and Revenue to GDP Ratio, 2019

(Percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Economic Outlook.

Revenue Administration Reforms:

  • Modernize the organizational structure of the NBR and develop the NBR’s performance management framework.

  • Modernize revenue administration, including via digitalization, to increase tax collections.

19. Additional spending measures would also make fiscal policy more growth friendly and inclusive in the medium term. Reducing the interest burden by limiting the use of NSCs as a financing vehicle and adopting a fuel pricing mechanism will help to accommodate additional spending and to strengthen the social protection system on a permanent basis. Modernizing and digitalizing core government functions can improve the efficiency of public service delivery and improve the transparency of public spending.12

20. Fiscal policy framework reforms are needed to scale up productivity-enhancing investments and safeguard fiscal sustainability. With low levels of overall government spending, achieving high levels of efficiency is important to achieve development goals. The stock of public capital remains low, and the perceived quality of infrastructure is closer to other low-income countries and markedly lower than emerging economies. Further efficiency gains can be realized by conducting a spending review. Steps in improving public investment and fiscal risks management include (Annex VI):

uA001fig14

Capital Stock and Infrastructure Quality

(Percent of GDP and ranking)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Sources: IMF, FAD Expenditure Assessment Tool (EAT).
  • Integrating the medium-term budget and the ADP processes to produce a consolidated medium-term budgetary framework (MTBF).

  • Developing and publishing an annual fiscal risk statement

  • Streamlining investment management and increasing the economic and spending efficiency of public-private partnerships (PPP) projects.

  • Improving the effectiveness of the budget execution system and timeliness of fiscal reporting.

  • Updating the 2014 medium-term debt strategy (MTDS).

Text Table. Bangladesh: Other Fiscal Policy Recommendations

article image

Authorities’ Views

21. The authorities reconfirmed their commitment to expand social and developmental expenditure while safeguarding fiscal sustainability. The authorities concur with staff’s assessment that strengthening fiscal revenue will sustainably finance higher spending. They maintained that adoption of digitalization solutions and automation would increase revenue collection. They plan to assess tax expenditure to rationalize tax incentives. They pointed out that since many tax filers voluntarily opt for the standard VAT rate to avail input tax credit, there is no need to further streamline the multiple VAT rates. The authorities are actively monitoring energy prices and noted that the November 2021 price increase will help contain fuel subsidies. Closing down loss-making SOEs and creating a database to monitor the financial performance of SOEs will reduce fiscal risks. The authorities plan to publish the updated MTDS within the third quarter of FY22. To improve public expenditure efficiency and cash management, the authorities are implementing the Public Financial Management Action Plan (2018–23) that envisages integrating IBAS++ with other PFM systems to facilitate overall financial operations and improve accountability.

B. Monetary and Exchange Rate Policy to Foster Macroeconomic Stability

22. With the economy rebounding, BB should closely monitor inflation pressures and stand ready to normalize, including to ensure that inflation expectations remain anchored. Lower demand from the COVID-19 shock kept inflation (at 5.6 percent) close to the authorities’ yearly target of 5.4 percent in FY21 despite monetary easing. Supply-side pressures, including floods, kept food inflation elevated in early parts of FY21. Reflecting higher energy prices, administered prices for kerosine and diesel were increased by 23 percent in November 2021. Nonfood inflation has been creeping up in recent months and the authorities should continue to assess the potential for second-round effects on inflation from a spike in global commodity prices.

uA001fig15

Contributions to Inflation

(y/y, in percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Bangladesh Bureau of Statistics

Text Table. Bangladesh: Bank Monetary Program and Outturns

article image
Source: Bangladesh Bank

23. The monetary stance should also strike a balance between supporting the recovery and maintaining financial stability. Unsterilized FX interventions during part of the remittance surge period and low credit to both the public and private sectors led to increased liquidity. Credit to the private sector was tepid reflecting disruptions related to COVID-19. In FY21, net issuance of NSC instruments nearly doubled, decreasing government reliance on bank borrowing. Excess liquidity has translated to historically low interest rates on T-bills and T-bonds, which in turn has led to historically low lending rates, making the cap on lending rates not binding for some borrowers.13 From May 2021, the authorities began mopping up liquidity, including in recent months through the sale of FX. The cap on lending rates constrains banks’ willingness to extend credit; nevertheless, the authorities should be prepared to speed up the withdrawal of excess liquidity if needed.

uA001fig16

Government T-Bill and T-Bond Rates

(In percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Bangladesh Bank.

24. Distortions in the lending and borrowing rates limit BB’s policy space. The lending rate cap and the floor on the deposit rates should be phased out to strengthen market-based pricing, credit allocation, and monetary transmission. The lending rate cap forced banks to lower deposit rates, often below the inflation rate. Despite this, deposit growth recorded 14 percent y/y growth in FY21, driven by remittance inflows, agent banking, and the stimulus package. Because of the negative real return on deposits, BB instructed banks to set a floor on deposit rates for individual term deposits and pension related funds at the rate of inflation, as calculated from the average of the last three months. A floor on deposit rates will put additional pressure on bank profits that could lead to less credit to the private sector and hurt growth. It will also limit BB’s ability to provide additional monetary stimulus, if needed. Instead of imposing caps to lower the lending rates, BB should address structural issues impacting the interest rate structure, such as improving the efficiency of the banking system and developing financial markets (Section D).

25. Continued progress towards modernizing the monetary policy framework and developing capital markets is vital. As the economy diversifies and further integrates into the global economy, financial markets will deepen and become more complex. A forward-looking strategy and an interest-rate based monetary policy framework will contribute to macroeconomic stability, promote financial development, and enhance the transmission of monetary policy to the broader economy. Strengthening BB’s independence will be important for improving monetary policy transmission. With Fund technical assistance (TA), the authorities plan to move from targeting monetary aggregates to interest rate targeting (Annex VI).14

26. Greater exchange rate flexibility would help buffer external shocks and manage domestic liquidity conditions. BB generally intervenes in FX markets to contain excess volatility. Appreciation pressures in FY21 were fully countered by BB’s purchase of US$ in FX markets and the Tk/US$ exchange rate remained relatively flat. Greater flexibility will also strengthen monetary transmission and help BB adopt an interest rate based monetary system.

27. Safeguarding FX reserve buffers remains crucial. The use of FX reserves to finance crucial infrastructure projects through the newly created Bangladesh Infrastructure Development Fund (BIDF) raises governance and external sustainability concerns. The BB has committed to finance the BIDF using FX reserves for up to US$ 2 billion, on the condition that (i) reserves are above 6 months of imports, (ii) project earnings are in FX, and (iii) a sovereign guarantee is provided. Other quasi fiscal operations pose similar risks. Given that risks are tilted to the downside, it would be prudent for Bangladesh to safeguard FX reserves as a buffer against shocks. Ad-hoc use of FX reserves could undermine fiscal discipline and expose the public sector to large contingent liabilities.

uA001fig17

Reserve Coverage

(In months of prospective imports)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Economic Outlook.

Authorities’ Views

28. The authorities agree that inflation in FY22 will likely be above their target of 5.3 percent given imported inflation driven by higher food and commodity prices. Inflation in FY22 is projected to be above 6 percent, and the authorities are closely monitoring second-round effects. They noted that recent FX sales have reduced excess liquidity and there are no financial stability risks from excess liquidity. The authorities pointed out that the interest rate cap has lowered the cost of credit and helped growth. They plan to continue the work on modernizing the monetary policy framework, including through IMF TA. To meet rising import needs, the authorities will continue to provide FX and allow the Taka to depreciate gradually against US dollar. They expect this to be a short-run phenomenon and for the exchange rate to stabilize with the repatriation of export proceeds and a pickup in remittances. The authorities emphasized that the lending from the BIDF was only to finance hard-to-finance part of the Payera Port project, and at no point total lending from the BIDF will exceed US$ 2 billion. They reiterated their resolve to maintain adequate reserve coverage and follow necessary safeguards.

C. Addressing Financial Sector Vulnerabilities to Mobilize Productive Investment

29. The banking sector in Bangladesh was weak before the COVID-19 shock, and the crisis has increased existing vulnerabilities. Between FY10 and FY19 the NPL ratio increased steadily, despite high GDP growth, due to structural weaknesses including in governance and legal infrastructure, compounded by lenient regulation, weak supervision and weak credit culture among some large influential debtors. As of September 2021, the overall NPL ratio for the banking sector stood at 8.1 percent of outstanding assets— reaching 20.1 percent for state-owned commercial banks (SOCBs). Reported NPLs do not fully reflect the extent of problem assets. Stressed advances, which encompass NPLs, restructured, and rescheduled loans, stood at 20.5 percent of outstanding loans at end-December 2018, about double the NPL ratio at that time.15 16 Also, the current NPL data do not capture the impact of policy relaxations introduced to counter the COVID-19 shock (Annex VII).17 Though capital in the overall banking sector is above the regulatory requirement (10 percent of risk weighted assets), capital in SOCBs (6.3 percent in end September) is below the regulatory minimum, and their profitability is lower than private banks. Ensuring adequate capital buffers is especially important given uncertainty about the quality of assets in the banking system.

30. COVID-19 policies have helped in the near term, but an orderly exit is needed to reduce the buildup of financial sector vulnerabilities. Any further support should be targeted, accompanied by monitoring and reporting for a timely identification of problem loans, with explicit sunset clauses.

  • Monitoring closely the asset quality of banks. In addition to collecting information about borrowers, sectors, and types of loans, implementing enhanced monitoring remains important. Identifying early signs of distress would help avoid large increases in NPLs after forbearance measures end.

  • Normalizing loan classification and provisioning rules. It is important to recognize problem loans as soon as possible and provision for them accordingly.

  • Enhancing the capitalization of banks. Undercapitalized banks should submit a feasible medium-term capital restoration plan• The authorities should limit dividend payouts until banks reach the regulatory minimum.

31. With increased vulnerabilities, financial sector risks pose a drag on medium-term growth prospects. Slow credit growth is symptomatic of high NPLs, low profitability, and distortions created by caps on the lending and borrowing rates. The urgency of implementing other existing policy recommendations has increased; these include:

  • Governance reforms: Strengthening the corporate governance of banks, including by strengthening the role of independent directors.

  • Regulatory reforms: Classification and provisioning requirements should be in line with Basel standards, including the treatment of rescheduled and non-performing loans.

  • Supervisory reforms: BB should strictly enforce the current prudential framework. To this end, strengthening BB independence and autonomy is key. The provision of waivers and phase-in periods for required provisions should be halted. BB is working toward risk-based supervision and is being supported by IMF TA (Annex VI).

  • Legal reforms: Legal features that allow delayed loan repayment should be addressed, and legal measures should be instituted to support stronger enforcement of creditor rights and debtor incentives to repay.

32. Improving the ability of banks to deal with NPLs, especially SOCBs where NPLs are most concentrated, remains a major policy challenge. Implementing reforms to stem the flow of NPLs is critical for the resolution of the stock of NPLs. These reforms are crucial to safeguard medium-term growth prospects. Conducting an asset quality review (AQR) of SOCBs, using definitions and provisioning in line with Basel standards, is an important first step to understand the extent of NPLs. Greater supervisory oversight, including developing internal NPL management skills and setting operational targets to reduce NPLs, can help initiate active NPL resolution in banks. Absent reforms to stem the flow of NPLs, establishing a public asset management corporation (AMC) poses significant fiscal risks. Moreover, it is not obvious that the AMC would have more expertise in resolution than the banks housing the NPLs. International experience suggests that the success of an AMC depends on good governance and sound design. The proposed Bangladesh Asset Management Corporation (BAMCO) draft law should address issues related to its mandate (no sunset clause, lack of details on how and when assets will be transferred, valuation of assets etc.), governance (potential for conflict of interest, expertise of the management), operational arrangements (lack of details on third party management), and transparency and accountability (no requirement for the regular publication of performance against targets).

uA001fig18

Non-Performing Loans, 2019

(In percent of gross loans)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: IMF Statistics Department, Financial Soundness Indicators.
uA001fig19

Return on Assets and Return on Equity, 2019

(Percent)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: IMF Statistics Department, Financial Soundness Indicators.

33. The authorities have made amendments to several laws and acts to strengthen the banking sector and should continue to align them with best international practices. Acts include the Bank Company Act (BCA) 2021 (amendment), Financial Institutions Act 1993 (now the Finance Company Act (FCA) 2021), Money Loan Court Act 2020 (amendment), Negotiable Instrument Act 2020, and the Bankruptcy Act 2020 (amendment). The broad objectives of the amendments are to define willful defaulters, make mergers between banks easier, improve the legal process to expedite loan recovery, improve the autonomy of BB, and put in place an orderly bank resolution system. While the amendments take steps to move toward best practices, further improvements are needed including strengthening the power of BB as the supervisor of SOCBs. The BCA and FCA were approved by the cabinet in May 2021.

Authorities’ Views

34. The authorities emphasized the important role SOCBs play, which was especially highlighted during the COVID-19 shock. The authorities underscored that if the COVID-19 situation remains “as is”, no further forbearance measures will be introduced. They reiterated that steps are being taken to reduce financial sector vulnerabilities post pandemic. Banks were required to maintain 1 percent extra provisions for loans that benefitted from the loan moratorium in 2020, extended until end-2021, and an extra 2 percent general provision for loans that benefitted from the ease of repayment measures in 2021. BB has instructed banks to collect data on loans benefitting from the moratorium, which they will examine, and they will also conduct on-site inspections. BB pointed out that of the loans that benefitted from the moratorium, 14 percent of what was due was repaid. To improve the performance of SOCBs, BB has signed MoUs with five of the six SOCBs. Like previous years, the authorities don’t plan to recapitalize the SOCBs. They noted that newly introduced online services and automation are likely to enhance profitability of banks. They emphasized that the amendments to the various Acts under consideration will effectively address any weaknesses in governance, supervision, and regulation.

D. Developing Capital Markets to Support Higher Investment and Growth

35. To develop capital markets, which can provide long-term finance, efforts to reform the NSC system should continue. On tap sale of NSCs, offering risk-free fixed interest rates above market rates, has hampered the development of local capital markets and prevented the implementation of a debt management strategy. Reforms in FY20 to enforce the cap on NSC issuance and increase the tax on interest income led to a decline in issuance by around 70 percent y/y. However, issuance in FY21 rebounded driven by the exceptional remittance inflows and the increase in the spread between the deposit rate and the NSC rate. Changes in the tiered interest rates on NSCs, introduced in September 2021, are a welcome move. However, the authorities should reform the mechanism of determining the interest rate to ensure better alignment with market-determined interest rates.

uA001fig20

Net Issuance of NSCs

(In Tk billion)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Bangladesh Bank.

Text Table. Bangladesh: NSC Interest Rates

article image
Source: Ministry of Finance

36. The Dhaka Stock Exchange reached a historic high in 2021. Total market capitalization is still relatively low at Tk 5.5 trillion or 18 percent of FY21 GDP. Turnover has been volatile but generally increasing since May 2020. In October 2021, the Dhaka Stock Exchange supported the trade of government bonds on the secondary market, allowing retail investors to purchase the assets. This development will contribute to the development of the government security market and other asset classes. Continued progress on implementing regulatory reforms to minimize risks, enhancing the transparency of stock market trading and information, and improving the capacity of the Bangladesh Securities and Exchange Commission (BSEC) remain important for capital market development.

uA001fig21

Market Capitalization

(Percent of Nominal GDP, data as of last month of Fiscal Year)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: CEIC Data Company Ltd.Note: Data for Bangladesh are for FY ending June, and for Nepal FY ending July.

Authorities’ Views

37. The authorities are working on developing capital markets. The authorities noted that tiered NSC rate cuts and continued automation of the NSC management system will reduce NSC issuances. The staffing of BSEC has been increased to enforce the implementation of governance guidelines. BSEC noted that the availability of an online account will broaden access to investing in the stock market. Trading in the government securities market is being automated to increase the number of securities available for secondary trading. They also shared that they were exploring the development of markets for municipal bonds and Environmental, Social, and Governance (ESG) financial instruments. More recently, a green sukuk bond was floated which was oversubscribed indicating a strong demand for investment opportunities. TA by donors is ongoing to enhance the regulatory environment.

Macro-Structural

Structural policies should focus on finding new drivers of growth, attracting private investment, and enhancing productivity to lift growth potential. Building climate resilience remains critical for the sustainability of growth. This will require improving the investment climate and investing in skill building. These reforms are necessary to prepare for LDC graduation and support the authorities’ goals to achieve middle-income status.

A. Strengthening Governance to Boost Investment

38. Bangladesh stands to gain from strengthening economic governance and improving frameworks to limit vulnerability to corruption. While close to the average for LIDCs on control of corruption indicators, Bangladesh trails South Asian peers and emerging market peers (Figure 7). Enhancing fiscal governance (¶20) and improving the efficiency of the financial sector (¶31) remain crucial for achieving medium-term goals. Further progress in digitalizing the public sector would help promote transparency and reduce corruption. Improving the skills and staffing of the Anti-Corruption Commission (ACC) to investigate cases will enhance governance and anti-corruption efforts. It is also important to strengthen the asset declaration process for public officials, including by publishing declarations for key officials, imposing sanctions for non-compliance, better verifying information, and using a standard method to utilize and update the declarations. Improved court capacity will be necessary to reduce case backlogs and long wait, including to make improvements in property rights and investor protection.

Figure 3.
Figure 3.

Bangladesh: Fiscal Priorities to Support Development Aspirations

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Figure 4.
Figure 4.

Bangladesh: Monetary and Financial Market Supported the Recovery

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Figure 5.
Figure 5.

Bangladesh: Banking Sector Challenges Persist

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Figure 6.
Figure 6.

Bangladesh: External Sector Remains Resilient

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Figure 7.
Figure 7.

Bangladesh: Governance Indicators 1/

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

1/ Use of these indicators should be considered carefully, as they are derived from perceptions-based data. Some uncertainty also exists around any point estimate.

39. The authorities have made progress on commitments made in the Letter of Intent (LOI) of the RCF/RFI. The Office of the Comptroller and Auditor General (CAG) completed three audits related to COVID-19 spending, including auditing accounts related to emergency response and pandemic preparedness, and spending related to doctors and healthcare workers treating COVID-19. These audit reports will be published online once they have been submitted to and accepted by Parliament. Procurement contract information on the procuring entity, method of procurement, advertisement date, awarded entity, and contact value are documented and published on the Central Procurement Technical Unit website.18 While information on beneficial ownership of awarded entities, has not been published online, given the current legal framework, this information has been made available to the audit agency, as committed in the LOI.

40. Implementing the recommendations of the 2022 safeguards assessment remains important. The governance and legal structure of BB needs to be updated to strengthen autonomy and thus better safeguard resources. Capacity constraints in the internal audit and accounting functions, identified in the 2011 assessment, remain unresolved. Continued capacity challenges are adversely impacting internal control, including risk management, internal audit, and the quality of financial reporting. It is important to improve the quality of financial statements and external audits. The time-bound exit strategy from non-core central bank activities (quasi-fiscal operations), including financing infrastructure development projects, exporters and other priority sector companies by extending foreign currency lending to and placing foreign currency deposits with local banks is critical to safeguard foreign reserves and reduce BB’s credit and reputational risks.

41. Progress has been made in strengthening the AML/CFT framework, but overall effectiveness is still lacking. In November 2019 the authorities published the National Strategy for Preventing Money Laundering and Combating Financial Terrorism. In order to empower reporting agencies to collect information on beneficial ownership and impose sanctions for violations, amendments to the Company Act have been put forward. Considerable work has been done in the offsite supervision tool, and future IMF TA missions will focus on completing the tool and the onsite supervision manual (Annex VI).

Authorities’ Views

42. The authorities agreed that strengthening governance, as highlighted by staff, is vital. The authorities have begun the process to ensure that information compiled on foreign exchange reserves is in accordance with the BPM6 guidelines. They highlighted that some progress has been made in strengthening the AML/CFT framework. They do not have any non-compliance ratings under the FATF. Guidelines for risk-based supervision have been issued, and amendments to the Company Act have been put forward to empower agencies to collect information on beneficial ownership and impose sanctions when transgressions are found. The third National ML/TF Risk and Vulnerability Assessment is ongoing. Efforts to strengthen the ACC continues. Resource allocations have been increased to enable it to function at a level commensurate with its mandate. The ACC has also committed to improve transparency by disseminating information in the public domain. It is expected to be more accountable through public hearings by the parliamentary committee. Along with enacting the Whistle Blower Act, the authorities plan to establish anti-corruption cells in various departments.

B. Boosting Exports and Productivity to Generate Good-Paying Jobs

43. Diversifying exports and maintaining competitiveness in a post-pandemic world is important for growth acceleration. RMG-led export growth has been a key driver of growth and job creation in Bangladesh. However, trade openness is low, and Bangladesh remains one of the least diversified LICs, both in terms of products and destination. The 8th FYP aims to diversify the production and exports of the non-RMG sector. Reducing relatively high nontariff barriers (NTBs) and domestic protection, improving trade-related infrastructure— especially energy and transportation, addressing regulatory barriers, and ensuring financing will be necessary to increase export competitiveness and expand trade.

uA001fig22

Trade as Share of GDP

(Weighted average, 2019 GDP)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Development indicators and IMF staff calculations.

44. Attracting FDI is critical to meeting the authorities’ aspirations. FDI inflows, averaging less than 1 percent of GDP over the past two decades, remains low compared to other LICs. Increasing FDI inflows is crucial to take advantage of GVCs, raising productivity, acquiring new knowledge and technology, and meeting large infrastructure needs in a constrained financing environment with underdeveloped capital markets. To facilitate FDI, the government is accelerating the setting up of Special Economic Zones (SEZs) and has started the One Stop Service virtual platform. However, attaining the ambitious target set in the 8th FYP will require improving the investment climate, including continued liberalization of FX regulations as conditions allow, a review of the regulatory framework to be more supportive of trade and outward FDI, and further legal reforms, such as land registration and contract enforcement.

45. Reducing labor skill-mismatches, increasing human capital, and access to technology would boost labor productivity and total factor productivity (TFP). Labor productivity is relatively low in Bangladesh. A sizable fraction of Bangladesh’s labor force is low skilled, and skill mismatch is a big hurdle for transiting to the formal sector. According to the ILO, in 2018, 26 percent of youth were not employed, being educated, or being trained. This is especially pronounced for females, 44 percent compared to 9 percent for males.19 Improving human capital and technology is crucial to boost productivity. Bolstering spending on health and education; improving educational outcomes, with emphasis on learning and acquiring workplace-relevant skills; and addressing the gaps in educational and vocational training would help with skill building. Upskilling of female workers is vital to improve productivity as well as gender equity. Also, targeted skill building for economic diversification is needed to offset the negative impact of automation and digitalization.20 Technological progress through FDI, digitalization, and investment in climate resilience are all likely to boost TFP. Boosting productivity is key to increasing growth potential.

uA001fig23

Labor Productivity is Relatively Low

(GDP per person employed, constant 2017 PPP $)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: World Development Indicators.Note: CAGR refers to compound annual growth rate, UMC to upper middle income, and LMC to lower middle income.

Authorities’ Views

46. The authorities are working on attracting FDI and boosting competitiveness. They noted that the one-stop service platform, investments in supporting infrastructure, and continued efforts to improve skills will create a conducive investment climate and boost competitiveness. The authorities are reaching out to investors to increase the awareness about the ongoing efforts to improve the business climate. 100 economic zones by 2030 have been planned. They are also stepping up investments in several megaprojects, high tech parks, and SEZs, as well as modernizing agriculture and encouraging agro-processing to diversify exports. To address the challenges of LDC graduation, high-powered committees to handle various aspects of graduation have been formed. In addition, the authorities are considering Bilateral Free Trade and Preferential Trade Agreements and are taking measures to reduce tariff and non-tariff barriers.

C. Tackling Climate Challenge to Build Resilience and Competitiveness

47. Building resilience to climate change and natural disasters is a key priority for sustainable growth. Bangladesh, the 27th most vulnerable country and the 26th least ready country per the Notre Dame’s Global Adaptation Initiative Index, has growing needs to mobilize private finance to meet adaptation expenses. The authorities have started allocating budgetary support for adaptation and have updated the Nationally Determined Contributions (NDC). However, climate relevant budgetary allocation has been less than 1 percent of GDP (both for mitigation and adaption) per year, well below the needed 3–4 percent of GDP per year.21 The authorities’ advocacy for adaptation and incentives for green financing has not yet been able to mobilize sufficient green financing.

uA001fig24

Climate vulnerability Index in LIDCs by Sector, 2019

(Higher values mean higher vulnerability)

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Notre Dame Global Adaptation Initiative and IMF staff estimates,Note: Box Plot displays the quartiles of the indices for LIDCs, where data is available, middle line being the median.
uA001fig25

Climate Readiness and Vulnerability Indices, 2019

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Source: Notre Dame Global Adaptation Initiative.Note: Kiribati and South Sudan are not depicted. The green and blue lines show the best linear fit for ASEAN and LIDCs groups respectively.

48. A range of policy actions, as envisaged in the 8th FYP, are needed to tackle climate change challenges and attract green financing. Reducing energy subsidies and increasing taxation of greenhouse gas emissions, as planned under the 8th FYP, will help meet NDC targets. Early implementation of carbon taxation or a carbon charge slated for FY25 in the 8th FYP may leverage private finance by signaling environmental commitments laid out in the NDC. This together with broader tax reforms could be a strong commitment signal and help mobilize green finance, as well as preserve competitiveness when border adjustment taxes are imposed by the EU.22 Financial sector reforms (¶31 and ¶32), capital market reforms (¶35), and governance reforms (¶38-¶40) will help catalyze private capital and FDI for climate action and for meeting broader SDG goals.

Authorities’ Views

49. The authorities highlighted their commitment to meeting the climate challenge. They underscored that Bangladesh has been on the forefront of climate action, including operationalizing the Climate Fiscal Framework and establishing the Climate Change Trust Fund. They highlighted their continued efforts, including via several central bank initiatives, to promote solar and other renewal energy sources to reduce emissions. BB also circulated the Sustainable Finance Policy for Banks and Financial Institutions in December 2020 and incorporated lists of 68 Green Products/Projects/Initiatives. They added that ten coal-fired power plants projects have been cancelled. The authorities emphasized that Bangladesh has largely been a recipient of climate change and concessional climate financing is needed to meet their mitigation and adaptation challenges. The authorities are also strengthening the regulations for tapping ESG finance, including BB’s issuance of Environmental and Social Risk Management Guidelines for mainstreaming ESG in overall credit rating methodology. While they broadly agree that a carbon charge could signal their commitment towards meeting their NDC targets, they reiterated that carbon pricing should be also adopted by other economies. They noted the political economy constraints linked to plausible increase in production costs and energy prices, and that implementing a progressive carbon charge was impeded by several factors, such as the lack of competent energy auditors.

Post Financing Assessment23

50. Bangladesh’s capacity to repay the Fund is sound. IMF credit outstanding was 83.4 percent of quota (0.4 percent of GDP) at end-FY21 and is projected to decline to 71.4 percent of quota at end-FY22 (0.3 percent of GDP). Bangladesh’s capacity to repay the IMF has slightly improved since the 2020 RCF/RFI disbursement, as the negative fallout of the pandemic on exports, remittance inflows, and ultimately GDP was less severe than anticipated at that time. These better-than-expected developments are also leading to a faster rebound of fiscal revenue, and the IMF debt service as a share to GDP, revenue, exports, and reserves is expected to be moderately lower over the medium term compared to the 2020 RCF/RFI disbursement projections. Overall, external and public debt are assessed at low risk of debt distress (DSA).

51. However, the repayment capacity is subject to downside risks (Annex VIII). The largest risk relates to a global resurgence of the COVID-19 pandemic lowering global growth, increasing commodity prices, and severely impacting Bangladesh’s exports, remittances inflows, and CA balances. The impact would be aggravated if local COVID-19 outbreaks require costly containment measures that severely disrupt domestic economic activity.

52. In the adverse scenario, Bangladesh’s capacity to repay the Fund would deteriorate mildly but would remain sound (Annex VIII). Containing the pandemic and reprioritizing spending would be crucial, should such downside risks materialize. Supporting the health system and re-enacting containment measures, while ensuring that export and import channels operate safely, as witnessed during the 2021 nation-wide lockdown, will be important. Managing these risks amid large uncertainty will require continued support for the economy, close monitoring of the financial sector, and gradually rebuilding buffers for policy maneuver as the recovery gets entrenched. Under such an adverse scenario, public finances would be impaired by lower revenue, higher health, social and energy subsidy spending, and contingent liabilities materializing from explicit and implicit state guarantees provided to SOEs.

Text Table. Bangladesh: Indicator: of Capacity to Repay the Fund, FY2021 -26

article image

Authorities’ Views

53. The authorities concur with staff’s assessment that the capacity to repay the Fund remains sound. Both fiscal and monetary authorities remain committed to jointly support the recovery and mitigate adverse shocks while safeguarding fiscal sustainability, should downside risks materialize.

Staff Appraisal

54. The authorities reacted swiftly and decisively to address the economic fallout of the pandemic. Various stimulus packages helped keep growth positive and aided a pickup thereafter. Entering the shock with macroeconomic stability was an important support to the authorities’ efforts.

55. Uncertainties remain high and risks are tilted to the downside. Key external risks include slower than expected recovery in trading partners, an increase in food and oil prices, and risks from cyber-attacks. Domestic risks include a COVID-19 surge, a lower-than-expected vaccination rate, and elevated NPLs. The authorities should stand ready to ramp up health and social spending if downside risks related to COVID-19 materialize.

56. Fiscal discipline has kept Bangladesh at a low risk of debt distress, but higher revenues are necessary to achieve developmental and social targets in a fiscally sustainable way. A multipronged revenue strategy to rationalize tax expenditure and modernize revenue administration, and fiscal policy framework reforms to strengthen investment management and fiscal risks assessment are needed to scale up social, developmental, and climate-related spending.

57. BB should monitor inflation developments closely and stand ready to normalize. Phasing out interest rate caps will strengthen market-based pricing, credit allocation, and monetary transmission. Efforts to modernize monetary policy should continue.

58. The external position is broadly in line with the level implied by fundamentals and desirable policies in FY21. Greater exchange rate flexibility, together with safeguarding FX reserves, will help buffer external shocks. Developing a well-defined public investment plan and financing strategy would help avoid the ad-hoc use of foreign exchange reserves, which raises governance and sustainability concerns.

59. The COVID-19 shock increased vulnerabilities in the already weak banking sector. A healthy banking sector will be critical to ensuring sustainable and high growth over the medium term. Priorities include an orderly exit from COVID-19 policies and strengthening corporate governance in banks, improving regulation and supervision, and legal reforms to enforce creditor rights.

60. Developing a well-functioning capital market can provide long-term financing and reduce dependence on bank financing. Reforms to the NSC system are welcome and should be continued to ensure prices are better aligned with market-determined interest rates. Progress on regulatory reforms and improving the capacity of BSEC remain important.

61. Strengthening governance and improving frameworks to limit vulnerability to corruption will help attract investment. Efforts to digitize the public sector will help promote transparency and reduce corruption. Improving court capacity to reduce case backlogs would also improve property rights and investor protection.

62. Attracting FDI, diversifying exports, and maintaining competitiveness are important for boosting growth potential. Improving the investment climate, reducing tariff and non-tariff barriers, improving trade-related infrastructure, and building industry-relevant skills would help in this regard.

63. Building resilience to climate change and natural disasters and attracting green financing remain important. The budget allocation to support adaptation to meet SDG goals can be bolstered. Additionally, reducing energy subsidies, and introducing greenhouse gas or carbon charge incrementally, can help meet the recently submitted updated NDC targets.

64. Bangladesh’s capacity to repay the Fund is sound. Bangladesh’s capacity to repay the Fund would remain sound both in the baseline and under an adverse scenario.

65. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Figure 8.
Figure 8.

Bangladesh: Expanding Exports and Boosting Productivity

Citation: IMF Staff Country Reports 2022, 071; 10.5089/9798400201943.002.A001

Table 1.

Bangladesh: Selected Economic Indicators, FY2018–23 1/

article image
Sources; Bangladesh authorities; World Bank, World Development Indicators; and IMF staff estimates and projections,

Fiscal year begins July 1.

Excludes deposits held in offshore accounts of resident financial institutions, noninvestment grade sovereign bonds, and foreign exchange overdrafts provided by BB to domestic banks.

Table 2.

Bangladesh: Medium-Term Indicators, FY2017–26 1/

article image
Sources: Bangladesh authorities; and IMF staff estimates and projections.

Fiscal year begins July 1.

Includes central government’s gross debt, including debt owed to the IMF, plus domestic bank borrowing by nonfinancial public sector and public enterprises’ external borrowing supported by government guarantees, including short-term oil-related suppliers’ credits.

Table 3.

Bangladesh: Balance of Payments, FY2017–26 1/

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Bangladesh authorities; and IMF staff estimates and projections,

Fiscal year begins July 1.

Imports are based on customs data.

Excludes official capital grants reported in the capital account.

Of identified amounts some are pending approval and some a re to be disbursed in 2020 after June.

Gross and net international reserves for the projection period do not include valuation adjustments, Net international reserves are reported at market exchange rates.

Table 4a.

Bangladesh: Central Government Operations, FY2017–26 1/

(In billions of Taka)

article image
Sources: Bangladesh authorities; and IMF staff estimates and projections.

Fiscal year begins Jury 1. Cash basis, unless otherwise specified.

Comprise budget allocations for safety net programs and other social-related spending, pensions and gratuities, and direct subsidies for food and to the agriculture and export sectors. Other subsidy-related costs (i.e., lending to large energy-related state-owned enterprises (SOEs)) are included in net lending.

Excludes net financing of autonomous and semi-autonomous government bodies, and government lending funds. Includes special bonds issued to the commercial banks for the noncash issued to the state-owned securitization of past subsidy-related loans made to Bangladesh Petroleum Corporation, consistent with the earlier treatment in the fiscal accounts of similar operations.

Includes food account surplus {-)/deficit [-) and extraordinary expenditures.

Includes National Savings Certificates, net purchase of Treausry securities by nonbank entities, and financing through the General Provident Fund.